LTV is a critical factor in mortgage lending decisions. A lower LTV represents less risk for the lender because the borrower has more equity in the property. Conventional loans typically require PMI when LTV exceeds 80% (down payment less than 20%). Lenders use the LOWER of the appraised value or purchase price to calculate LTV. Higher LTV ratios generally result in higher interest rates and additional requirements like mortgage insurance.
A buyer purchases a $400,000 home with a $60,000 down payment, borrowing $340,000. LTV = $340,000 / $400,000 = 85%. Since LTV exceeds 80%, PMI is required on a conventional loan. Once the loan balance drops to $320,000 (80% LTV), the borrower can request PMI removal.
Know the formula: LTV = Loan Amount / Property Value. The key threshold is 80% — above 80% LTV, PMI is required for conventional loans. Remember that lenders use the LOWER of purchase price or appraised value. The exam may give you down payment percentage and ask for LTV (100% minus down payment percentage = LTV).
Related Terms
Related Concepts
In the context of foreclosure, a deed transfers ownership of the foreclosed property to the new owner, typically the buyer at a foreclosure sale.
A trustee sale is a type of foreclosure where a trustee, appointed under a deed of trust, sells the property at auction to satisfy the debt.
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
Frequently Asked Questions
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